The Philippines and Thailand are the New Indonesia (and That’s Not a Good Thing)

By Ben Levisohn

European Pressphoto Agency

The Philippines and Thailand rewarded investors big time in 2012–but they may disappoint those hoping for a repeat in 2013, says Credit Suisse.

The reason: Their stock markets have grown more than their earnings per share–just like Indonesia in 2012.

When markets produce outsized gains, we often forget that thjose returns can only last if earnings grow with them. That’s because over long periods of time, stock returns usually equal earnings growth. Sometimes stock prices rise faster, sometimes they rise more slowly but over time they will revert to the mean.

That’s what happened to Indonesia last year. In 2011, The analysts write: “…it took a while for the gap between Index and EPS to narrow, [but] it certainly did narrow in 2012, with MSCI Indonesia up just 0.4% in USD terms even though Indonesia EPS grew by 6%.”

They expect something similar to happen to Thailand and the Philippines this year.

[In] the Philippines the equity price Index is well above EPS. Significantly, like in Indonesia in July 2011, the current large gap appears to be as large as that seen in October 2007. While this figure highlights that equity price indices can stay above EPS for extended periods of time, it also highlights that they do eventually correct towards EPS.

[The] Thai equity price index has also risen to above EPS (the line of best fit). We note that Thailand has joined the Expensive 4 club for the first time since we started running our price-to-book adjusted by ROE valuation model in March 2000.

Indonesia, however, looks like a good bet. “Given that the gap has narrowed, there appears to be room for Indonesia’s price index to rise more in line with 2013E EPS growth of 13%,” the analysts write.

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